The market rate of interest rises. Which of the following is NOT a correct result of this rise?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → The present value of a bond rises.
A higher rate of interest makes holding money costlier and makes future returns worth less today. So the present value of a bond falls, and its price falls with it.
Option (1) Money demanded comes down. — True. Holding money now gives up more interest.
Option (2) Holding money means giving up more interest. — True. Interest is the opportunity cost of holding money.
Option (3) The price of bonds falls. — True. Bond price is inversely related to the rate of interest.
Option (4) The present value of a bond rises. — False. In the book’s example the present value falls from Rs 109.29 to Rs 107.33 when the rate rises from 5 to 6 per cent.
NCERT (2026-27): “3.2.1 Demand for Money … Specifically, when interest rates go up, people become less interested in holding money since holding money amounts to holding less of interest-earning deposits, and thus less interest received. Therefore, at higher interest rates, money demanded comes down.” “The Speculative Motive … Calculation reveals that it is Rs 109.29 (approx.). … Now consider an increase in the market rate of interest from 5 per cent to 6 per cent. The present value, and hence the price of the same bond, will become … 107.33 (approx.) It follows that the price of a bond is inversely related to the market rate of interest.” |